TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 Report 21 For the fiscal year ended March 31, 21
Contents 2 Snapshot 4 Financial Highlights 6 To Our Shareholders 8 An Interview with President & CEO Atsushi Saito 12 Review of Operations Cash Equities Market and Derivatives Markets IT Infrastructure Improving the Corporate Governance of Listed Companies Self-Regulation 2 Board of Directors 22 Corporate Governance 24 Financial Section Review of Operations and Finances Consolidated Financial Statements Notes to Consolidated Financial Statements Independent Auditors Report 44 Market Data 46 Organization 47 Corporate Data
About Tokyo Stock Exchange Group Profile Founded in 1878, Tokyo Stock Exchange (TSE) has served as Japan s central market and played a crucial role in the growth and expansion of the national economy. The TSE offers a wide range of products including stocks, exchange traded funds (ETFs), real estate investment trusts (REITs), and futures and options on Japanese Government Bonds and the Tokyo Stock Price Index (TOPIX). The TSE provides not only market operation services, but also clearing and settlement, market information and other related services. The TSE became a stock corporation in November 21. In August 27, the TSE reorganized itself and Tokyo Stock Exchange Group, Inc. (the holding company of Tokyo Stock Exchange, Inc., a market operation company, and Tokyo Stock Exchange Regulation, a self-regulatory organization) was established in order to make market operations a profit-oriented business and to ensure the independence of its self-regulatory functions. (Collectively, these three companies and their subsidiaries are referred to as the TSE group. ) TOKYO STOCK EXCHANGE GROUP, INC. Subsidiaries and affiliates Tokyo Stock Exchange, Inc. Market operations Tokyo Stock Exchange Regulation Self-regulatory operations Japan Securities Clearing Corporation Clearing operations for trading in marketable securities TOKYO AIM, Inc. Operation of specified financial instruments market Emissions Trading Exchange Preparatory Corporation, Inc. Preparation for establishing an emissions trading market Japan Securities Depository Center, Inc. Book-entry transfer and custody operations for securities Ownership 1% TOKYO STOCK EXCHANGE REGULATION Ownership 1% TOKYO STOCK EXCHANGE, INC. Subsidiaries and affiliates TOSHO SYSTEM SERVICE Co., Ltd. ICJ, Inc. Tosho Computer Systems Co., Ltd. Systems development, etc. Operation of electronic voting platform for institutional and foreign investors System operations TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 1
Snapshot Share of Trading Value of Listed Stocks on Domestic Exchanges Number of Listed Companies on Major Stock Exchanges Tokyo Stock Exchange: 2,313 companies Tokyo Stock Exchange: 95.8% As of March 31, 21 Exchange Number of Listed Companies Bombay Stock Exchange 4,975 NASDAQ OMX 2,823 London Stock Exchange 2,749 NYSE Euronext (US) 2,323 Hong Kong Exchanges 1,332 Shanghai Stock Exchange 878 Singapore Exchange 774 Source: World Federation of Exchanges As of March 31, 21 Trading Value of Stocks and TOPIX TSE Ranks Second Globally in Total Market Capitalization ( trillions) (Points) 8 6 4 2 26.3 27.3 28.3 29.3 21.3 Yearly Trading Value (left scale) TOPIX Closing Value (right scale) 2, 1,5 1, 5 Exchange US$ millions NYSE Euronext (US) 12,423,557 Tokyo Stock Exchange 3,534,685 NASDAQ OMX 3,5,875 NYSE Euronext (Europe) 2,793,199 London Stock Exchange 2,773,395 Shanghai Stock Exchange 2,63,841 Hong Kong Exchanges 2,325,349 TSX Group 1,817,263 Bombay Stock Exchange 1,373,16 National Stock Exchange India 1,338,495 Source: World Federation of Exchanges As of March 31, 21 2 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Composition of Operating Revenues (Fiscal year ended March 31, 21) 35.8% ( 21,728 million) Tokyo Stock Exchange, Inc. Trading Participation Fees Transaction fees Per capita fees Access fees. Trading system facilities usage fees 21.9% ( 13,272 million) Tokyo Stock Exchange, Inc. Listing Fees Listing examination fees Initial listing fees Fees for issuing new shares. Annual listing fees 17.7 % ( 1,727 million) Tokyo Stock Exchange, Inc. Income from Information Services. Fees for market information services 11.9% ( 7,247 million) Japan Securities Clearing Corporation Japan Securities Settlement & Custody, Inc. 12.7% ( 7,692 million). Fees for trade guarantees and other services by JSCC. Fees for securities custody and delivery services by JSSC Other Operating Income Income from Securities Settlement TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 3
Financial Highlights The consolidated financial results for the year ended March 31, 27 and the previous term are those of Tokyo Stock Exchange, Inc. Tokyo Stock Exchange Group, Inc. was established on August 1, 27. The consolidated financial statements for the year ended March 31, 28 are a continuation of the previous consolidated financial statements of Tokyo Stock Exchange, Inc. The consolidated financial results for the years ended March 31, 21 and 29 are those of Tokyo Stock Exchange Group, Inc. Financial Data US$ thousands 6 millions except per share data and ratios except per share data 21.3 29.3 28.3 27.3 26.3 21.3 FOR THE YEAR Operating revenues... 6,666 67,9 75,55 75,478 69,893 $ 652,38 Operating profit... 14,825 14,175 28,787 33,16 28,751 159,338 Net income (loss)... (3,62) (3,696) 17,71 19,985 18,833 (38,717) EBITDA 1... 13,431 3,867 38,96 41,852 35,747 144,357 YEAR END Total assets... 391,75 677,163 717,676 565,519 617,864 $4,23,32 Total equity... 116,941 114,89 117,776 111,247 95,661 1,256,888 PER SHARE DATA EPS 2... (1,584.27) (1,626.65) 7,785.4 8,789.64 8,257.83 $ (17.3) BPS 3... 5,85.81 49,113.92 5,859.77 48,289.71 41,6.8 538.33 BPS 3,5... 42,447.39 41,475.5 43,221.35 4,651.29 33,961.66 456.23 KEY FINANCIAL RATIOS ROE 4... (3.2%) (3.3%) 15.7% 19.6% 21.9% ROE 4,5... (3.8%) (3.8%) 18.6% 23.6% 27.5% Note: 1. EBITDA = Income (loss) before income taxes and minority interests + Interest expense + Depreciation 2. EPS = Net income (loss) / Weighted-average number of common shares for the year 3. BPS = Shareholders equity / Weighted-average number of common shares for the year 4. ROE = Net income / Shareholders equity (average) 5. Calculated excluding the default compensation reserve funds 6. Rate of US$1 = 93.4 used for conversion Market Data 21.3 29.3 28.3 27.3 26.3 21.3 FOR THE YEAR Equities trading volume (million shares).. 566,896 542,14 554,34 56,895 588,554 Equities trading value ( billions)... 379,62 497,426 72,454 678,249 591,5 $4,74 TOPIX futures trading volume (thousand contracts)... 14,93 17,595 17,382 14,73 14,273 JGB futures trading volume (thousand contracts)... 7,76 8,681 14,9 11,81 1,929 YEAR END Number of listed companies... 2,313 2,37 2,415 2,413 2,372 Market capitalization ( billions)... 33,281 255,99 396,8 559,385 563,349 $3,55 Index (TOPIX)... 978.81 773.66 1,212.96 1,713.61 1,728.16 6. Rate of US$1 = 93.4 used for conversion 4 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Operating Revenues Operating Profit Net Income (Loss) 8 ( billions) 4 ( billions) 25 ( billions) 6 3 2 15 4 2 1 2 1 5 26.3 27.3 28.3 29.3 21.3 26.3 27.3 28.3 29.3 21.3-5 26.3 27.3 28.3 29.3 21.3 EBITDA Total Assets Total Equity 5 ( billions) 8 ( billions) 12 ( billions) 4 6 9 3 4 6 2 1 2 3 26.3 27.3 28.3 29.3 21.3 26.3 27.3 28.3 29.3 21.3 26.3 27.3 28.3 29.3 21.3 EPS BPS ROE 1, ( ) 6, ( ) 3 (%) 8, 6, 5, 25 2 4, 4, 15 1 2, 3, 5-2, 2, 26.3 27.3 28.3 29.3 21.3 26.3 27.3 28.3 29.3 21.3-5 26.3 27.3 28.3 29.3 21.3 BPS BPS (calculated excluding the default compensation reserve funds) ROE ROE (calculated excluding the default compensation reserve funds) TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 5
To Our Shareholders Atsushi Saito President & CEO Tokyo Stock Exchange Group, Inc. Profile Atsushi Saito was with Nomura Securities Co. Ltd. for 35 years, starting in 1963. After 2 stints in New York, he became a member of the board in 1986 and Executive Vice President in 1995. Over the course of his career with Nomura, he took charge of a wide range of projects in different divisions including Treasury & Fixed Income Dealing, Equity, Syndicate & New Products, and so on. In the late 198s he focused on securitization of non-performing loans in the United States such as Financial Center Building in Manhattan. Prior to becoming President & CEO of the TSE in June 27, he tackled various revitalization projects as President & CEO of the Industrial Revitalization Corporation of Japan since its inception in 23. 6 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
We are preparing for global economic recovery by constructing a robust profit structure as well as a growth framework for our next leap forward. Although the global economy underwent a financial crisis triggered by the bankruptcy of Lehman Brothers in the fall of 28, cooperation between national governments and industry has supported a moderate recovery from the bottom in March 29. However, fiscal problems emerged during 21 in Greece and other Euro-zone countries, while the pace of economic recovery in the US is slowing. A steady recovery of the global economy is likely to require more time. Under these economic conditions, global capital flows into equity investments decreased substantially. While continued strong growth in developing countries such as China, India, and the countries of Southeast Asia is enhancing their economic importance, investor interest in Japanese equities has decreased. Moreover, remarkably fast-growing IT-driven ECNs, MTFs, and other off-exchange trading facilities are giving rise to noticeable issues such as market fragmentation, regulatory discrepancies between markets and free-riding on the self-regulatory functions of incumbent exchanges in the EU and US. In the near future, this trend is also likely to affect Japanese stock markets. The flash crash that occurred in the US in May 21 is an example of a phenomenon arising from these factors. The TSE group (Tokyo Stock Exchange Group, Inc., Tokyo Stock Exchange, Inc., Tokyo Stock Exchange Regulation and other subsidiaries) is in the midst of a three-year medium-term management plan formulated in 28. Its target is to create a Universal Exchange, a reliable and user-friendly market that attracts investors and listed companies from across the globe. The TSE group is working together to achieve this target through two basic strategies: (1) quantitative expansion, which involves diversifying lines of trading products and providing top-caliber trading systems; and (2) qualitative enhancement, which involves strengthening self-regulatory functions, including disseminating our message to facilitate enhanced corporate governance of listed companies and promote compliance among market participants. We are thus devoting our efforts to securing our position as the premier exchange for the effective flow of funds in Asia. Meanwhile, the significant changes in the global economy and market conditions are exerting a profound impact on the TSE group s operating environment. To respond appropriately to these changes in light of the initiatives of the past two years and the current business environment, the TSE group will dedicate the final year of its medium-term management plan to constructing a robust profit structure by expanding the size of the market and constructing a growth framework on a diversified revenue base. At the same time, we will continue to strive for growth and the next leap forward by conducting highly active strategic marketing. The TSE group will be counting on the continued support and cooperation of all market users. TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 7
An Interview with President & CEO Atsushi Saito Q1: What is the TSE group s status after two years of the medium-term management plan? Based on the medium-term management plan formulated in 28, the TSE has moved aggressively to generate new growth by further enhancing the value of the TSE markets while upgrading its infrastructure to satisfy the needs of participants. In particular, advances in information technology have given rise to off-exchange transactions in ECNs and MTFs, which have siphoned off significant liquidity from exchanges in major markets in the EU and US. Consequently, rapid and smooth execution of orders is a major factor determining the competitiveness of incumbent exchanges. The TSE has therefore devoted itself to fundamentally enhancing its trading systems as befits the premier exchange in Asia. The next-generation trading system arrowhead, launched in January 21, is one of the major outcomes of this approach. Developed as a trading system with the world s highest standards, arrowhead offers superior stability while dramatically shortening the time required for both order response and information distribution. Even in its early stages of operation, the system has achieved an order response time of 2. milliseconds and an information distribution time of 2.5 milliseconds. Moreover, arrowhead has brought about a significant evolution in the execution environment, with the daily average number of trades increasing from 3 to 4 per stock. As the participation of investors using sophisticated trading techniques such as high-frequency trading grows, we expect a wide array of investors in Japan and overseas will use this leadingedge trading system to buy and sell Japanese cash equity products. Furthermore, in October 29 we renovated the options trading platform of the derivatives market with the launch of Tdex+ System, which is based on the trading system LIFFE CONNECT of NYSE Liffe, a subsidiary of NYSE Euronext and one of the largest derivatives exchanges in Europe. This has equipped the TSE derivatives market with a worldclass trading environment that boasts a greatly enhanced execution speed for options transactions and the ability to perform sophisticated strategy trading. The TSE has also begun offering a Co-location Service that minimizes the latency of order acceptance notices and quote information distribution between the systems of market users and exchange data centers by allowing trading participants to install order placement servers next to TSE trading systems. Meanwhile, one of the TSE group s policies for quantitative expansion is to increase the number of exchange traded funds (ETFs) to provide investors with a diverse array of attractive investment opportunities. Over the past two years, the number of ETFs listed on the TSE increased by 52 to 86, and stood at 93 as of July 21. We have been working to provide products that meet a wide range of investor needs by diversifying our product lineup. This 8 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Framework of Medium-Term Management Plan for Fiscal 28 to Fiscal 21 Target Launch a Universal Exchange Basic Strategies Quantitative Expansion Diversify lines of trading products Provide top-caliber trading systems X Maximize Synergies Qualitative Enhancement Facilitate enhanced corporate governance of listed companies Strengthen self-regulatory functions Expand the Size of the Market Secure Position as the Premier Exchange in Asia includes commodity ETFs for gold and other precious metals, which have attracted interest as relatively safe investments, ETFs for global sovereign bonds, and emerging country equities. We also introduced dividend index futures and, in addition, will create a position transfer scheme with NYSE Liffe for TOPIX futures and other products in October 21. As for qualitative enhancement, improving corporate governance of listed companies is a crucial management issue for us. We have worked to create an environment in which everyone can invest with confidence by dealing with corporate conduct that infringes significantly upon the rights of existing shareholders, such as capital increases through third-party allotments, which adversely affect the rights of minority shareholders. To protect the interests of general shareholders, we introduced the requirement for all listed companies to secure at least one independent director or auditor. Also, in light of recent changes in disclosure of corporate information, we amended the TSE rules to increase listed companies discretion and flexibility for reporting financial results. Q2: What is the TSE group s business plan for the fiscal year ending March 211? Based on changes in the current business environment, the TSE group will dedicate the fiscal year ending March 211 to constructing a robust profit structure by expanding the size of the market and constructing a growth framework on a diversified revenue base. Concurrently, the TSE group will continue to strive for growth and the next leap forward through highly active strategic marketing. We will support these activities through both quantitative expansion and qualitative enhancement the basic strategies of the medium-term management plan. For quantitative expansion, we will strengthen derivatives markets by expanding the lineup of listed products and improving trading rules and frameworks. We will also add to the number of newly listed companies and ETFs to increase the depth of the cash TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 9
Fiscal 21 Action Plan Quantitative Expansion 1. Strengthen derivatives markets Examine development of new product lines Increase convenience by securing diverse trading opportunities Qualitative Enhancement 5. Protect the rights and interests of shareholders and investors Further enhance conditions for improving corporate governance of listed companies market, while providing a safe, high-performance trading system, including the integration of the futures trading platform into Tdex+ System. In addition, promoting new businesses will include expanding the Co-location Service in order to support investors that use highfrequency trading and /or other sophisticated trading methods, and providing clearing and settlement services for credit default swaps (CDS) and other over-the-counter (OTC) derivatives. At the same time, our measures for qualitative enhancement will include promoting improvements of listed companies corporate governance to protect the rights and interests of shareholders and investors. We will also ensure listed company compliance designed to preclude corporate actions that may infringe upon the interests of shareholders /investors, as well as support compliance among listed companies and market participants to prevent insider trading. Additionally, we intend to enhance corporate efficiency and customer satisfaction by utilizing our internal systems to improve business processes, and by strengthening and promoting marketing of the whole company. The TSE group will steadily implement these measures in its efforts to enhance the efficiency and functionality of the TSE. We are confident that we will meet the expectations of all market participants. Expand lineup of existing products 2. Increase the depth of cash market List various products Fiscal 21: 1 ETFs listed (triple fiscal 27 figure) Take measures against expansion of off-exchange trading Improve conditions to increase convenience for listed companies, etc. Consider establishment of an emissions trading exchange 3. Provide a safe, high-performance trading system Enhance and strengthen arrowhead functions and capabilities Upgrade the futures trading platform Construct and operate secondary site 4. Promote new businesses Provide clearing and settlement services for OTC derivatives trades, etc. Enlarge index business Provide new information services and expand existing services Expand co-location services Promote system provision to external parties Expand new system businesses 6. Establish a fair and reliable market Implement preventive listed company compliance Conduct more sophisticated and effective market surveillance appropriate for trading activities after arrowhead launch Strengthen support of compliance for market participants via TSE COMLEC (TSE Compliance Learning Center), etc. Maximize Synergies (Basis for quantitative expansion and qualitative enhancement) 7. Enhance our corporate efficiency and customer satisfaction Use internal systems to improve business processes 8. Broaden individual investor base by improving financial literacy Improve financial literacy via the TSE Academy Upgrade Tdex+ System functions Promote optimization (EA: enterprise architecture) of TSE systems as a whole Develop sophisticated quality control process Strengthen and promote marketing of the whole company 1 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
An Interview with President & CEO Atsushi Saito While the recovery of the global economy will require more time, the TSE group will properly meet all market users needs as it steadily increases convenience and improves its ability to attract investment in its markets. We intend to actively contribute to economic growth in Japan and the region as the premier exchange in Asia by allocating global risk capital to growing companies. Q3: What has the TSE group learned from the experience of the global financial crisis, and where is it heading in the future? As is well known, the financial crisis triggered by the bankruptcy of Lehman Brothers immediately swept through global markets. Advances in financial engineering have realized sophisticated financial products such as derivatives, but the recent subprime loan problem, which involved complex financial instruments traded in the OTC market, magnified the crisis. The resulting credit crunch quickly spread through the world s financial markets, leading to a renewed focus on counterparty risk. In contrast to this, exchanges continuously provide market functions, while reducing counterparty risk by accurately identifying market risks through clearing institutions, thus fulfilling a legitimate and worthwhile social function. They have proven their ability to allocate risk efficiently via the market throughout their history, and no one can dispute exchanges exceptionally important role in the capital market. However, the concern is that the financial crisis provides momentum to the introduction of excessive regulation in the EU and US, which could interfere with market efficiency. Certainly, the crisis exposed issues such as unethical and negligent conduct among some financial institutions, in which corporate governance is superseded in the pursuit of profit, and also tolerance of laissez faire free markets through a lack of rules and regulations. However, this is not an acceptable justification for the introduction of excessive regulation that contravenes the original adjustment mechanisms of markets. The TSE group believes that it is responsible for continuously making every effort to increase market transparency and efficiency so that it can best exercise appropriate market functions under any circumstances and provide a free market open to everyone. Especially during times of global economic instability, exchanges must provide an important infrastructure that supports the capital markets and fulfill their social responsibility in a stable and sustainable manner. With countries in the EU and the US struggling under recession, a new age is beginning in which Asian countries such as China and India are the engines of economic growth in the world. As an institution that promotes the public good and supports the capital markets of Japan, Asia s most advanced core market, the TSE group will devote itself to becoming the bridge linking the region to financial markets all over the world. TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 11
Review of Operations Cash Equities Market and Derivatives Markets The TSE works to provide attractive listed products and a reliable and user-friendly market infrastructure to remain competitive with other markets around the world. In the fiscal year ended March 21, the TSE provided a wide variety of ETFs while also launching arrowhead, a next-generation trading system in the cash equities market. In the derivatives markets, the TSE introduced the new options trading platform, Tdex+ System. Cash Equities Market Financial technology has become more advanced over the past several years. Online trading has become prevalent among individual investors, while high-frequency trading, algorithmic trading and other new trading techniques have come into wide use among securities companies and institutional investors. These changes in the market environment have increased the need among market users for high-speed order placement, execution processing and information distribution, as well as requiring the TSE to respond to sudden increases in order volume. Moving to resolve these issues, the TSE launched arrowhead, a nextgeneration equities trading system, in January 21. While upgrading market infrastructure, the TSE has also focused on expanding the number of ETFs to provide investors with a diverse range of investment opportunities, which is one of the core elements of its medium-term management plan. ETFs allow diversified investment in various products at low cost using a relatively small amount of funds. In order to enable the creation of a variety of products, the TSE needed to encourage related government authorities to prepare a statutory framework and was also required to revise its listing rules and systems. Therefore, over the past several years the TSE has resolved these issues one by one in preparing a foundation for the expansion of ETFs. As a result, against the backdrop of rising interest in commodities investment, the number of listed commodity ETFs has increased substantially, bringing the total number of listed issues from 58 as of March 31, 29 to 93 as of July 31, 21. As a result of this development, investment in commodities such as precious metals, energy, and agricultural products, which have been a focus in recent years, can be conducted conveniently through ETFs. Moreover, in July 21 four unique ETFs were listed that are physically backed by precious metals and give investors the option to redeem ETF units for physical delivery of precious metals from the custodian in Japan. 12 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Additionally, several products were listed that meet demands for diversified international investments. These products include ETFs that are linked to overseas stock indices such as the Dow Jones Industrial Average, an index of Indian stocks, and indices that offer comprehensive coverage of developed and emerging countries, as well as those linked to bond indices in foreign countries. The TSE will work to promote the ETF market in order to provide investors with diverse and appealing investment products. Growth in Number of ETFs 1 93 86 8 6 58 4 34 2 12 27.3 28.3 29.3 21.3 21.7 Derivatives Markets The TSE upgraded the infrastructure of its derivatives markets in October 29 by introducing the new options trading platform Tdex+ System, which makes options trading more convenient by greatly increasing order processing capabilities and enabling strategy trading. In tandem with the launch of Tdex+ System, the TSE introduced a market-maker scheme that has supplied liquidity to facilitate options trading. In the fiscal year ending March 212, the TSE plans to integrate its currently independent futures trading platform into Tdex+ System, which will enable all derivative products listed on the TSE to be traded in a trading environment of the world s highest standard. Furthermore, in terms of product diversity, the listing of Dividend Index Futures in July 21 accommodated dividend swap trading needs, which have been expanding globally. Also, in October 21, the TSE plans to list TOPIX futures on NYSE Liffe, which will effectively result in 24-hour trading of TOPIX futures by enabling trading during the nighttime in Japan (daytime in the EU and US). The TSE will further enhance market convenience for investors by introducing a position transfer scheme to unify position management via automatic transfer of daily TOPIX trading positions on NYSE Liffe to the TSE. The TSE will strive to enhance the functionality of the derivatives market while continuing to respond to the various needs of investors. New Initiatives Launched in June 29, TOKYO AIM, a new market for professional investors, makes use of know-how gained from London Stock Exchange Group plc. s AIM, the largest market in the world for growth companies. TOKYO AIM provides a venue for meeting the funding needs of growth companies in Asia and Japan. Given the rising awareness of environmental issues, the TSE is now considering the establishment of an emissions trading exchange in order to facilitate emissions trading as an economic mechanism to reduce greenhouse gases. In April 21, the TSE established a preparatory company in a joint venture with Tokyo Commodity Exchange, Inc. The TSE has committed itself to expanding listed products with the aim of building an appealing market for investors. TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 13
Review of Operations IT Infrastructure arrowhead: Equities and Convertible Bonds Auction Trading As financial technology continues to become more advanced, employing exchange systems of superior quality to provide a more user-oriented trading environment is an essential element for success in the increasingly intense international competition among securities markets. In response to this changing environment, during the fiscal year ended March 21, the TSE significantly strengthened its IT infrastructure by launching two systems which meet the world s highest standards: the next-generation equities trading system arrowhead and the new options trading platform, Tdex+ System. The TSE is now reviewing the integration of its futures trading platform into Tdex+ System in order to provide high-caliber trading systems for all products in the near future. Speed: Order response time of approx. 2 milliseconds, information distribution time of approx. 2.5 milliseconds (during continuous auction) Reliability: Highly reliable in processing trading information such as incoming orders, executions, and the current order book on synchronized 3-node data servers Scalability: Achieves scalability by ensuring twice the maximum processing capacity of actual conditions on a continuous basis In January 21, the TSE launched the next-generation trading system arrowhead. The drastic revision of the previous system design has remarkably improved speed, reliability and scalability. Trading rules were also substantially revised based on global trading practices from the perspective of smooth price discovery and improved market liquidity. Thus the TSE is optimizing its trading environment both in terms of system infrastructure and trading rules. Specifically, the introduction of arrowhead enables an order response time of approximately 2 milliseconds and an information distribution time of approximately 2.5 milliseconds. High-speed trading and market information at the millisecond level enables real-time response to market trends during trading, and is expected to facilitate enhanced liquidity and creation of new business models through the participation of investors using sophisticated trading methods such as high-frequency trading. The TSE s measures to make trading smoother have included revising daily price limits and relaxing matching 14 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
conditions when the opening price is decided. Also, arrowhead enables finer-tuned trading by reducing tick sizes based on the characteristics of stocks, which has made equity trading on the TSE market significantly more functional and efficient. The introduction of arrowhead has transformed the TSE trading environment into one of the world s most advanced markets. The TSE will take advantage of the strong international competitiveness resulting from the introduction of the new trading system to respond to the expectations of all investors as the premier market in Asia. Tdex+ System: Options Trading The TSE replaced its system for options trading in October 29 when it launched the new Tdex+ System. Based on the LIFFE CONNECT trading system used by NYSE Liffe, one of largest derivatives exchanges in Europe, the TSE constructed Tdex+ System as an options trading platform with a processing capability of the highest caliber (order response time of about 6 milliseconds). In conjunction with the start of this new system s operations, the TSE introduced a new market-maker scheme and aligned its trading rules with international standards to secure liquidity for the TSE options market and enhance convenience for investors around the world. In addition, in April 21 the TSE began reviewing the integration of its futures trading platform into Tdex+ System. All of the TSE s trading systems will have been replaced at the completion of this plan, allowing it to provide investors with trading systems of the world s highest class for every product. The use of Tdex+ System will improve the functionality and liquidity of the derivatives market and create synergy between the cash equities and derivatives markets, which is expected to realize further quantitative expansion of the TSE s markets. Co-location Service The TSE has begun providing a Co-location Service that allows maximum use of the capabilities of the trading systems it has incorporated with the introduction of Complete Replacement of Systems [Equity and CB trading] Launched on January 4, 21 Co-location [Options trading] Tdex+ System Launched on October 5, 29 [Futures trading] Current trading system Launched on January 15, 28 arrowhead and Tdex+ System. This service allows trading participants to install servers and other order execution devices in the co-location areas of the TSE primary site, which accelerates trading speeds by minimizing the physical distance from TSE systems. Recent advances in IT technology have given rise to new investor segments that use sophisticated trading techniques such as high-frequency trading. These trends have significantly changed the market environment, requiring timely and appropriate responses from the TSE to enhance market functionality with the aim of further expanding the liquidity of the market. Business Continuity Plan (BCP) Upgrade Integration under review [Futures trading] Tdex+ System Under review Launch targeted mid-211 The TSE group has formulated a BCP defining the basic policy, system, and procedures for continuing business in cases where operations become difficult to continue. Its objectives are to minimize the impact on trading participants, listed companies, investors and other stakeholders and to improve confidence in Japan s securities markets by continuing business activities to the greatest extent possible if an emergency situation arises. This BCP therefore serves to enhance the reliability of the TSE market. In addition, the TSE group has completed the construction of a secondary site (backup systems) to support its trading platforms. The TSE will work to strengthen its BCP and implement a series of secondary responses for other core systems. TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 15
Review of Operations Improving the Corporate Governance of Listed Companies The TSE believes that effective corporate governance is an indispensable element of corporate activities, through which listed companies generate sustained increases in corporate value. In particular, the experience of the financial crisis of 28 created a strong interest among investors in improving the corporate governance of listed companies. The TSE makes an effort to maintain an environment in which investors can invest with confidence. In order to fulfill its responsibilities as a venue for high-quality risk capital from Japan and overseas, the TSE is working actively to improve the corporate governance of listed companies. Improving the TSE s Listing Rules and Systems In summer 28, prior to implementing concrete steps to improve the corporate governance of listed companies, the TSE solicited a wide variety of opinions from and held hearings with institutional investors and other related parties in order to identify and resolve corporate governance issues of listed companies. Based on the opinions and requests obtained through this process, the TSE amended its listing rules and systems twice during 29. First, in August 29, the TSE introduced restrictions on third-party allotments that infringe upon the rights of existing shareholders. Then, with shareholder rights and interests in mind, in December 29 the TSE introduced the obligation of listed companies to have an independent director or auditor. The TSE also implemented other measures to further enhance corporate governance through improved dialogue between shareholders and listed companies. An overview of these latest amendments to the TSE s listing rules and systems are as follows. Introduction of Rules for Third-Party Allotments Under the Companies Act in Japan, if so stipulated by a company s articles of incorporation, the Board of Directors may resolve to issue new shares up to a maximum of three times the number of shares issued and outstanding without the specific approval of the general meeting of shareholders. Consequently, from the existing shareholders point of view, significant dilution of their equity ownership could occur. Comparative opinions gathered from institutional investors also underscore serious issues because in the markets of the EU and US, the general meeting of shareholders must approve the issue of new shares, and existing shareholders have the pre-emptive rights of first refusal in the event of such allotments. Most important, third-party allotments in which the Board of Directors decides the recipients of the new shares reduce the effectiveness of corporate governance because they allow the management to select controlling shareholders. 16 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Therefore, in August 29 the TSE amended the regulations regarding third-party allotments by introducing a restriction on such allotments in order to protect shareholder rights against unfair infringement. The amendment of the rules included the following. First, for third-party allotments that involve the issuance of new shares equivalent to 25 percent or more of outstanding shares or a change in control of a listed company, the listed company is obliged to employ procedures that increase consent among existing shareholders. In the event of such third-party allotments, the Board of Directors must complement its resolutions by obtaining the opinions of persons who are independent from the management, such as an independent committee, or receiving approval from the general meeting of shareholders. In addition, the status of a third-party allotment that results in a change in the controlling shareholder must be monitored for three years after such allotment so that the recipient of shares that became the new controlling shareholder cannot coerce the listed company into disadvantageous transactions. This mechanism was introduced to constrain and prevent problematic conduct. Second, the basis for calculating the price of shares issued as a result of a third-party allotment must be disclosed appropriately. Moreover, a listed company is obliged to properly disclose the opinion of an auditor or Board of Auditors with the authority and responsibility for auditing legality so that the issue price does not unduly favor the recipient of such allotment. In December 29, the above items were included in the securities registration statement, etc., which companies must submit to the Financial Services Agency (FSA) in accordance with the Financial Instruments and Exchange Act, with false statements to be deemed legal violations that are subject to criminal penalty. independent decisions about their companies operations. Under the Companies Act of Japan, it is required that listed companies that employ a Board of Auditors, which make up the majority of listed companies, appoint at least two outside auditors (at least half of the Board of Auditors). Furthermore, the portion of listed companies that employ a committee system are obliged to elect two or more outside directors for each committee (more than half the number of members of each committee). However, some have pointed out that adequate consideration is not taken for the requirements for these outside auditors and directors in terms of independence from the management, compared to the systems used in other countries. In view of protecting the interests of shareholders, the presence of directors and auditors with an independent stance who are not likely to be in conflict with shareholder interests is an extremely important component of the minimum corporate governance framework for listed companies. Therefore, in December 29 the TSE moved to amend its rules to oblige listed companies to secure one or more independent directors or auditors who are not likely to have a conflict of interest with shareholders in order to protect shareholder interests. The revised regulations were applied successively starting from the general meetings of shareholders held in June for the fiscal year ended March 21. As of June 3, 21, approximately 94 percent of listed companies had secured one or more independent directors or auditors. Listed companies with a market capitalization of JPY 1 trillion or more secured an average of 4.6 independent directors or auditors. Securing Independent Directors/Auditors The corporate governance principles that the Organization for Economic Cooperation and Development (OECD) amended in 24 call for boards of directors to make objective, TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 17
Review of Operations Criteria for Examining Independence The independent director/auditor must be selected from the outside directors/auditors. An outside director/auditor of a company means a person who is not a director, executive officer, or employee of such company or its subsidiary, and has not been one in the past. In cases where the independent director/auditor is a person who may be subject to considerable control from the management, or can exercise considerable control on the management, it cannot be claimed that such director/auditor is not likely to have a conflict of interest with general shareholders. As such, TSE provides the criteria for examining whether there is a likelihood of a conflict of interest with general shareholders. A person who executes business for the parent company or a fellow subsidiary A major business counterpart or the person who executes business for such business counterpart A consultant, accounting professional, or legal professional receiving a large amount of money and other assets, other than director/auditor compensation, or a person under the employ of such an organization A person who met any of the above criteria recently Close relatives of any of the above persons, or persons who execute business for a listed company or its subsidiary In addition to the above, in December 29 the TSE amended its regulations to enable more flexible fund raising by allotting transferable subscription warrants to existing shareholders, also known as a rights issue. Numerous other developments enhanced the usability of rights issues, including the Financial Services Agency s revision of offering disclosure regulations. Moreover, to improve corporate governance through facilitating a dialogue between shareholders and listed companies, the TSE improved conditions for voting in the general meeting of shareholders by requiring all listed companies to provide notice of the general meeting of shareholders and make it available on the TSE website (successively implemented from the annual general meetings of shareholders in June 21). Also, in October 29 the TSE requested listed companies to proactively disclose the results of the exercise of voting rights (tally of for and against votes for agenda items). In addition, the Financial Services Agency requires listed companies to disclose the results of the exercise of voting rights of the general shareholders meetings by Extraordinary Reports, beginning with the regular meetings convened in June 21. The TSE is improving the transparency and fairness of its markets and, with a view to enhancing its international competitiveness, continues its efforts to enhance the corporate governance of listed companies in cooperation with related parties. 18 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Review of Operations Self- Regulation Creating a market where investors can invest with confidence is an extremely important aspect for fulfilling market functions. The TSE entrusts Tokyo Stock Exchange Regulation (TSE Regulation) with the responsibility for maintaining the fairness and reliability of the markets, and as such, for ensuring their quality. TSE Regulation fulfills appropriate self-regulatory functions in working to structure the TSE market so that all investors can invest with confidence. Overview of Activities Market surveillance plays a crucial part in market fairness and reliability. TSE Regulation performs detailed monitoring of daily transactions and conducts surveillance for unfair transactions such as market manipulation and insider trading. If the results of this surveillance indicate possible violations of laws or the TSE rules by trading participants or listed companies, TSE Regulation implements rigorous measures and reports the results of all investigations to the government authorities. For example, TSE Regulation performs inspections of all the disclosure materials of listed companies containing material information to determine whether any insider trading has occurred. Where the market surveillance system of TSE Regulation identifies stocks whose price or trading volume seems abnormal, TSE Regulation also surveys such stocks for manipulation and analyzes specific transactions. TSE Regulation has enhanced the functions of its surveillance system in conjunction with the introduction of arrowhead to create a system for conducting even more efficient and effective surveillance activities. When conducting these activities, TSE Regulation coordinates closely with not only the TSE but also securities companies, listed companies and government authorities. In addition to the above activities, over the past several years the TSE has also emphasized the prevention of unfair trading before it occurs. TSE Regulation established a TSE Compliance Learning Center called TSE COMLEC in June 28. It holds compliance seminars and provides educational tools for market participants, listed companies and other market users in order to prevent the occurrence of unfair transactions. Moreover, TSE Regulation surveys corporate actions of listed companies and determines through its examination whether penalties or other measures against a listed company would be appropriate, to maintain and enhance the quality of listed financial products. It also conducts new activities to offer fairer and more reliable markets, including holding seminars on listed company compliance to prevent inappropriate corporate actions among listed companies. Future Initiatives TSE COMLEC seminar The launch of the new equities trading system arrowhead improved the speed of order placement and executions significantly and enabled new trading techniques. These factors have substantially changed market trading conditions. TSE Regulation is responding appropriately to these changes by enhancing the sophistication and efficiency of trading surveillance to continue protecting the fairness and reliability of its markets. Also, TSE Regulation moves to provide further support for compliance and deepen the understanding of market users about unfair transactions and inappropriate corporate actions through TSE COMLEC and other means to maintain the fairness and reliability of the market. TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 19
Board of Directors (Current as of June 23, 21) Tokyo Stock Exchange Group, Inc. Board of Directors Atsushi Saito President & CEO Hiroyuki Iwakuma Senior Executive Vice President & COO Tsuguoki Fujinuma CPA Professor, Chuo University Graduate School of Strategic Management Yoshinari Hara Chief Corporate Adviser Daiwa Securities Group Inc. Masakazu Hayashi President Tokyo Stock Exchange Regulation Masayuki Hirose Audit Mission Director Katsuhiko Honda Corporate Counselor Japan Tobacco Inc. Toshiaki Katsushima CPA, Tax Accountant Nomination Committee Atsushi Saito Hitoshi Maeda Hiroshi Okuda Audit Committee Satoshi Shiibashi Masayuki Hirose Toshiaki Katsushima Kunihiro Matsuo Compensation Committee Yoshinari Hara Katsuhiko Honda Atsushi Saito : Indicates the committee chairman Executive Officers Atsushi Saito President & CEO Yoshinori Suzuki Executive Vice President & CIO Koichiro Miyahara Senior Executive Officer Hiroyuki Iwakuma Senior Executive Vice President & COO Tomoyoshi Uranishi Senior Executive Officer Norio Iwasaki Executive Officer & CFO 2 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
Eiko Kono Ex-President Recruit Co., LTD. Charles Ditmars Lake II Representative and Chairman Aflac Japan Hitoshi Maeda Professor Emeritus Gakushuin University Oki Matsumoto Representative Director, President & CEO Monex Group, Inc. Kunihiro Matsuo Attorney-at-law Tokyo Stock Exchange, Inc. Hiroshi Okuda Senior Advisor, Toyota Motor Corporation Satoshi Shiibashi Standing Outside Statutory Auditor Tokyo Stock Exchange, Inc. Board of Directors Atsushi Saito President & CEO Hiroyuki Iwakuma Representative Senior Managing Director & COO Yoshinori Suzuki Senior Managing Director & CIO Tomoyoshi Uranishi Managing Director Yoshinari Hara Katsuhiko Honda Eiko Kono Charles Ditmars Lake II Hitoshi Maeda Oki Matsumoto Hiroshi Okuda Auditors Standing Outside Statutory Auditor Satoshi Shiibashi Statutory Auditors Masayuki Hirose Toshiaki Katsushima Kunihiro Matsuo Executive Officers Atsushi Saito President & CEO Yoshinori Suzuki Senior Managing Director & CIO Hironaga Miyama Senior Executive Officer Moriyuki Iwanaga Executive Officer Hiroyuki Iwakuma Representative Senior Managing Director & COO Tomoyoshi Uranishi Managing Director Masaki Shizuka Executive Officer Yasuhiro Yoshida Executive Officer Tokyo Stock Exchange Regulation Board of Governors Masakazu Hayashi President Taro Takeda Standing Governor Atsushi Shimizu Lawyer Auditors Standing Auditor Kenji Sato Kiyoyuki Tsuchimoto Standing Governor Tsuguoki Fujinuma Auditor Toshiaki Katsushima TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 21
Corporate Governance Integrated Operation of Markets by Three Companies In November 27, the Tokyo Stock Exchange and its subsidiaries adopted a structure whereby Tokyo Stock Exchange Group, Inc. (the TSE Group ) serves as the holding company for Tokyo Stock Exchange, Inc. (the TSE ), which operates the markets, and Tokyo Stock Exchange Regulation ( TSE Regulation ), which conducts the self-regulatory activities of listing examination, listed company supervision, participant inspection and market surveillance. Self-regulatory activities are an essential function of a stock exchange. The TSE ensures the independence of its selfregulatory activities by delegating them to TSE Regulation, which also gives the TSE group (Tokyo Stock Exchange Group, Inc., Tokyo Stock Exchange, Inc., Tokyo Stock Exchange Regulation and subsidiaries), as a whole, flexibility and freedom in executing its business strategy. Within this structure, the three companies of the TSE group constantly work together in the operation of the securities market, guided by a common corporate philosophy of striving to create a sound market with a high level of reliability and convenience. A Stronger Management Structure Through fulfilling its mission of becoming a vital element of public infrastructure as the central securities market of Japan, the TSE group strives to secure stable income while maintaining a balance between its public nature and profitability. Basic Policy on Corporate Governance The TSE group provides markets with a high level of liquidity and reliability based on the following policies. Increase management transparency by clarifying the authority and responsibilities of each corporate body, and exercising accountability. Establish a structure to reflect the opinions of a wide variety of stakeholders, including investors, in the management and operation of the market. Fulfill appropriate self-regulatory functions by ensuring impartial decision-making independent from the influence of particular stakeholders. Corporate Governance Structure The TSE Group, the holding company, employs a committee system, separating management surveillance and supervision of business execution using the following structure in order to enhance these functions and increase management transparency. Board of Directors The Board of Directors is responsible for overseeing management and consists of 16 or fewer members. It makes decisions on the basic policy and important issues concerning management, and also oversees the business activities of executive officers in accordance with those decisions. A majority of the directors are appointed from outside the company in order to increase the transparency and accountability of management, and enhance supervision of the adequacy of business execution. Board of Executive Officers The Board of Executive Officers is composed of all six executive officers. It discusses important issues relevant to business execution from among those that are to be discussed in meetings of the Board of Directors as well as those the Board of Directors has delegated by its resolutions to the president and chief executive officer. Nomination Committee The Nomination Committee comprises three directors, including two outside directors. It decides on proposals regarding the election and dismissal of directors to be submitted at the General Meeting of Shareholders. Audit Committee The Audit Committee comprises four directors, including three outside directors. It conducts efficient audits and the like by monitoring and verifying the structure and operation of the internal control system in close collaboration with accounting auditors, the internal audit division, auditors of subsidiary companies and others. Compensation Committee The Compensation Committee comprises three directors, including two outside directors. It determines the compensation and other remuneration for individual directors and executive officers. 22 TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21
President s Advisory Committee The TSE Group established the President s Advisory Committee as a forum to exchange a wide range of opinions about the TSE group and the securities market in general. Members of this committee include academics and representatives of listed companies. State of Corporate Governance at Subsidiaries Tokyo Stock Exchange, Inc. (Market operator) The TSE currently employs an auditor system. The Statutory Auditors Board is composed of four individuals, including one standing statutory auditor and three outside auditors. The TSE has enhanced its auditor structure in ways such as requiring the Board to meet at least once a month in principle. In addition, the TSE has assigned the Auditors Office as support staff for the Statutory Auditors Board. The statutory auditors attend significant meetings, including those of the Board of Directors and Committee of Executive Officers, and conduct audits focused on the legitimacy of operations. They also strive to increase effectiveness of accounting and operational audits in cooperation with accounting auditors, the Auditors Office, and the statutory auditors of the TSE s subsidiaries. Tokyo Stock Exchange Regulation (Self-regulatory organization) TSE Regulation was established to perform the selfregulatory activities delegated by the TSE. It is a non-profit membership organization as set forth in the Financial Instruments and Exchange Act, with its membership composed of equity contributors. Decisions on important self-regulatory activities are made by the Board of Governors. Measures to enhance the independence of the Board of Governors from the stock exchange include selecting governors so that the majority has no interests in the stock exchange, listed companies or similar institutions, and valuing opinions of these highly independent outside governors in resolutions. Corporate Governance Structure of the TSE group TOKYO STOCK EXCHANGE GROUP, INC. General Meeting of Shareholders Nomination Committee President s Advisory Committee Board of Directors Directors President & CEO Executive Officers Audit Committee Compensation Committee Group-wide Conference TOKYO STOCK EXCHANGE, INC. TOKYO STOCK EXCHANGE REGULATION Advisory Committees Market Structure General Meeting of Shareholders Board of Directors Statutory Auditors Board General Meeting of Members Board of Governors Auditors President & CEO Directors Auditors President Governors Note: The Financial Instruments and Exchange Act requires a majority of the governors of TSE Regulation to be highly independent outside governors, and the president to be elected from among the outside governors. As of June 21, three of the five governors are outside governors. Advisory Committees Discipline President s Advisory Committee TOKYO STOCK EXCHANGE GROUP, INC. Annual Report 21 23